TOKYO (Reuters) -Japanese Finance Minister Katsunobu Kato said on Friday the government will continue "careful consideration" on whether to buy back super-long bonds in the future, suggesting the option remains on the table.
In response to a global bond market rout that led to a spike in super-long Japanese government bond (JGB) yields last month, the Ministry of Finance (MOF) on Monday cut the scheduled sales of super-long bonds in a revision to this year's issuance plan.
But it stopped short of announcing plans to buy back super-long JGBs issued in the past, defying market expectations the government would take the rare step to show its resolve in curbing sharp yield rises.
While ruling out the chance of immediate buybacks, Kato said the government would consider the idea including by sounding out investors' views on how such a move could affect markets.
"We'll continue careful consideration, taking into account various opinions" among investors, Kato told a news conference.
The remarks follow those by an MOF official earlier this week who said the government would not rule out buybacks as a future possibility.
Buying back previously issued, low-coupon super-long JGBs would enhance liquidity in those bonds and allow bond dealers to trade their securities more easily.
The idea has gained traction within the government as life insurers, faced with an imminent need to reshuffle portfolios, sold super-long bonds in a move that caused a spike in yields.
Buying back bonds in huge amounts will likely take time as the government needs to set aside funds under a state budget. If conducted, it will be the first for fixed-coupon JGBs since fiscal 2008.
The decision to forgo buybacks did not cause a sell-off with super-long yields now off record highs marked in May.
Masahiko Loo, senior fixed income strategist at State Street Global Advisors, said the MOF's hinting the possibility alone was "symbolically powerful as it sends a clear message that they are prepared to act if needed."
But some analysts expect oversupply in super-long bonds to persist and, coupled with concern over Japan's worsening finances, could keep the JGB market jittery.
"Foreign investors have partially replaced insurers as buyers of super-long bonds, but sustainability of their demand is inherently more uncertain," Barclays said in a report, adding it is unclear whether the latest issuance cuts will suffice.
With politicians pledging big spending ahead of upper house elections on July 20, some investors see the chance of another bout of volatility that could revive discussions of buybacks.
"Given that the recent market rout was caused by a selloff of JGBs with low coupons, it makes more sense to buy back those bonds than cutting issuance," said Shuichi Ohsaki, senior portfolio manager at Meiji Yasuda Asset Management.
(Reporting by Makiko Yamazaki, additional reporting by Takaya Yamaguchi and Mariko Sakaguchi; Editing by Sam Holmes)
By Makiko Yamazaki and Mariko Sakaguchi
